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For almost any investor, Roth IRAs are a terrific option, especially if you’re planning to use your savings to pay for expensive items like a home or a college education because they have advantageous withdrawal regulations and tax advantages.
A Roth IRA is a retirement account that offers tax advantages and enables retirees to withdraw money tax-free. Investors cannot claim contributions as a tax deduction, but they are exempt from paying taxes on future earnings. Additionally, investors are free to withdraw funds at any time without being penalized (Although there are still rules to be aware of).
An excellent moment to begin saving is always now.
Are numerous Roth IRA accounts permissible?
You are permitted to maintain an unlimited number of IRAs, including Roth IRAs. Here are a few typical justifications for why you would want to create several accounts:
- Compare the performance of several providers: Open a Roth IRA with a few different robo-advisors and compare the results offered by each.
- Self-directed Roth IRA: Some investors might also opt for a self-directed Roth IRA, which allows them to make investments in securities that are more unusual and not accessible through a standard Roth IRA.
- Add different beneficiaries: You can also designate a different beneficiary for each Roth IRA, making estate planning easier. You can, for example, have multiple Roth IRAs for each of your children. (Note: You could alternatively combine the funds into one IRA and just add several equal-share beneficiaries.)
No matter how many IRAs you own, you are still not permitted to contribute more than the yearly individual contribution cap. The annual cap is $6,000 in 2022 or $7,000 for individuals who are 50 or older.
Keeping track of your annual contribution cap can be challenging if you make contributions to different IRAs. If you use multiple IRAs, make sure you don’t go over the maximum. Over-contribution carries a 6% fee on the extra amount.
What is the point of having multiple Roth IRA?
There are few instances where keeping your Roth IRAs separate may be beneficial. For instance, if you:
- Traditional IRA to Roth IRA conversion: Maintaining that IRA apart from another Roth IRA may be preferable. Unless at least five years have passed since you made a contribution to a Roth IRA, you cannot take earnings tax-free from one. It would be challenging to manage and identify which funds have satisfied the five-year holding requirement and which are subject to an early withdrawal penalty if the IRA assets were converted and mixed with the original Roth IRA, according to Marianne M. Nolte, CFP of Imagine Financial Services.
- You received a Roth IRA as an inheritance: Your existing Roth IRA and the one you’ve inherited should not be combined. Financial advisor Katy Cook of Abacus Financial Planning explained that there are separate tax regulations for inherited Roth IRAs, as well as regulations specific to spouses, minor children, and other individuals.
- Your college fund is set up: If your retirement objective and your child’s college expenses have distinct schedules, you might want to keep the money you’re saving in a Roth IRA separate. You can then modify your investment decisions in accordance with the timeline for each goal.
If you have several IRAs, consider your objectives and whether you actually require so many IRAs to reach them. A tracking mechanism should be put up to prevent you from forgetting about your IRAs and going over the contribution limit. Additionally, make sure that the contact information on your IRAs is updated with the relevant information.
Ask a financial planner if having numerous IRAs is still the best option, if you haven’t already.